 Deposit insurance and bank liquidation without commitment: Can we sleep well?Russell Cooper and Hubert Kempf () Post-Print from HAL Abstract: This paper assesses the effects of the orderly liquidation of a failing bank and the ex post provision of deposit insurance on the prospect of bank runs. Assuming that the public institutions in charge of these policies lack commitment power, these interventions, both individually and jointly, are chosen and undertaken ex post. The costs of liquidation and redistribution across heterogeneous households play key roles in these decisions. If investment is sufficiently illiquid, a credible liquidation policy will deter runs. Despite the lack of commitment, deposit insurance, funded by an ex post tax scheme, will be provided unless it requires a (socially) undesirable redistribution of consumption that outweighs insurance gains. If taxes are set optimally ex post, runs are prevented by deposit insurance without costly liquidation. If not, a combination of the two policies will prevent runs. Keywords: Bank runs; Commitment; Deposit insurance; Optimal liquidation; Redistribution (search for similar items in EconPapers) Published in Economic Theory, 2016, 61 (2), pp.365-392. ⟨10.1007/s00199-015-0897-4⟩ There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01306030 DOI: 10.1007/s00199-015-0897-4 Access Statistics for this paper More papers in Post-Print from HAL |
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